What We Believe About Investing

We believe that portfolio management for private investors begins and ends with risk management. Warren Buffet has expressed his bafflement over the financial risks that people take, even after they have achieved a sizeable amount of savings. He said,


“Why risk something that is important to you, in order to gain something that is not as important?”


Investors spend their working years saving for retirement, and are then lured by the financial industry into betting all that money in order to make a little more.


We believe that “risk” is not a statistical measure. Common investment theory defines risk as “standard deviation” – a mathematical computation of the amount by which your monthly account balance bounces up and down. We adopt the more timeless and sensible view that risk is best defined as the probability of a permanent loss of capital.


We believe that investment markets are very efficient. The daily work of the free market bidding, the price of publicly-traded securities, does a remarkably good job of setting a “fair” price. Meaning that any investor has a remote chance of outsmarting that process and ending up with outsized returns. A high volume of trading activity almost always results in higher costs, higher taxes, and a lower return through time. Trying to be too smart usually ends badly.


We believe that certain classes of investments will occasionally become mispriced. Despite the efficient pricing of individual securities (such as stock in a particular company), on occasion an entire class of investments becomes mispriced. Examples include the stock bubble of the late 1990s and the housing bubble of the early-mid 2000s. A sharp selloff of stocks in March 2009, and of municipal bonds in late 2010, created opportunity. When these mispricings occur, investors are well-served to act accordingly and seek low-risk excess returns.


We believe that the only sensible path to investment success is to have a valuation discipline. Fundamentals matter most. Growth and momentum-drive strategies require investor to repeatedly get the timing right. It is our belief that it is far easier to get the price right, and then time will take care of itself. If you pay too much for an asset, all the time in the world won’t help you. If you pay the right price, time will serve to compound your gains.


We believe that textbook approaches to investing are best left to the classroom. The tech world is jumping on the investment bandwagon with software-driven solutions that ignore the real world we live in. In the real world, the backwards-looking statistical tools of “modern portfolio theory” provide poor guidance to wise investing. The past average rate of return of some asset class – or its standard deviation or correlation to other assets – does not matter to us. What matters are its price right now and the prospects for its profitability looking forward. Conditions change, and we have to change with them.


We believe that expenses matter. The average US investor pays more than 2.5% in total investment costs. That is more than half of the expected return looking out over the next ten years. Unless there is a compelling reason not to, we will deploy low-cost index funds and ETFs in major asset classes. We will structure direct laddered portfolios of municipal bonds, where appropriate, in order to avoid mutual fund fees.


We believe that your advisor should have a fiduciary duty to you. A fiduciary is a person that is placed in a special position of trust and responsibility – who is required, at all times, to put the client’s interest first. By definition (and law), a commissioned advisor is not a fiduciary. Brokerage firms lobby intensively to avoid being required to have a fiduciary duty to a client. To whom does an advisor at a big brokerage firm owe a fiduciary duty? To his or her employer, not the clients. Creekside Partners is, at all times, a fiduciary to its clients.